In this episode, Catherine and I talked about:
The unique qualities of this family office
How they use hedge funds as a risk adjustment tool
Why use of technology and AI (artificial intelligence) is important
How much they allocate to hedge funds
Their approach to qualifying new managers
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“For your audience that are looking at asset gathering, the takeaway from this chat would be how to demystify how one family looks at fund managers. And we don’t see one-size-fits-all. Because hedge is only one asset class within our portfolio management. We see hedge as a risk adjustment, a way to manage our overall capital that’s at risk. So we don’t have the traditional look at managers just for rate of return. We actually have much more of an institutional perspective, which is risk management.”
“We are both market and sector agnostic when it comes to hedge. It just depends on the duration of our portfolio cycle. Again, it has to be a piece that fits into our overall (portfolio) puzzle and that puzzle constantly gets (re)balanced. When I say constantly, we have a five-year mandate and then an annual mandate. The one-year mandate is very short, so we tend to take a longer vision when we invite new managers into the fold. “
“…to us, when a (fund) manager doesn’t embrace or know how to use tech in their fund management, in their portfolio, we find that interesting but not in a positive way.”
“…we’ve found that (an important fund manager criteria is) people with a passion and especially for a certain strategy and a basis for that.”
TRANSCRIPTION: October 2019, Catherine Shiang, Managing Director, Single Family Office
JB: Welcome to Hedge Interview. I’m your host Jennifer Bruno and today on the Investor Views series I’m speaking with Catherine Shiang. Catherine is the managing director of a single family office with offices in Asia, North America and Europe. She has extensive experience in limited partnerships, and she’s had many principal and advisory roles in venture capital, private equity, mergers and acquisitions and hedge funds. She has served as an advisor to CEOs and has been a member on numerous boards and non-profits. She’s also an accomplished attorney, previously associated with three global law firms. Catherine holds a Bachelor of Arts from UC Berkeley with a minor in Biochemistry and she earned her law degree from Georgetown University. Thank you so much for joining me today Catherine.
CS: Thank you for having me Jennifer. I appreciate this.
JB: So tell me a little bit about your firm and your primary focus.
CS: Well, we’re a little bit different. We are a single-family office and we’ve been in existence officially since the early 1900s, but we were loosely doing what we’re doing now since the late 1800s, and we originally began in Asia. When World War World War II came, the family fled. The Japanese had seized the family’s assets, and many of the family members lost their lives. So, over decades the family regrouped. We’re still in manufacturing, which is the core operating companies. So, our family began in rattan making bamboo furniture exporting, and if you look at old movies, you’ll see a lot of furniture from the Belle Epoch period.
JB: Wow, that’s a really long history there!
CS: We’re a little different in that capacity in the sense of two things: We have operating capital that throws out cash every year, so we’re not in the cash preservation mode. So our risk profile is maybe a little different from families that don’t continue to have operating companies or families that are younger, still in their operating capacity and still building and aggregating their wealth. So those are important (distinguishing) features.
For your audience that are looking at asset gathering, the takeaway from this chat would be how to demystify how one family looks at fund managers. And we don’t see one-size-fits-all. Because hedge is only one asset class within our portfolio management. We see hedge as a risk adjustment, if you will, a way to manage our overall capital that’s at risk. So we don’t have the traditional look at managers just for rate of return. We actually have much more of an institutional perspective which is risk management. So our managers and the hedge strategies are a broad array of managers that we have, from event-driven, to CTAs, to managed futures, long/short, different markets. So we use hedge as a way to manage other portfolio risk. So there’s no one-size-fits-all. A lot of younger families might specifically want long/short or event-driven, and they only look for the return. We don’t. We look at how that fund will fit into our overall portfolio construction.
JB: Towards capital preservation, as you said? So, would you say you are more risk-averse?
CS: No, because we have operating capital, we are less risk-averse. We have a healthier risk appetite, so that’s a little different. For the risk aversion side of it, we’re similar to institutional. Let me clarify, Risk aversion in terms of new emerging managers that do not have the compliance in place. They don’t have the investment in technology to help manage their front and mid office, communications, third-party accountability for their fund administration (etc.), so risk in terms of the portfolio management itself instead (of), versus the return.
JB: Do you have a specific mandate for certain types, or as you said, it’s pretty broad? How do you make your decision as far as which types of managers? Are you pretty open? How do you narrow down your choices since there are so many?
CS: That’s a very good question. There are two things that your question is actually asking, two questions in one: (1) What type of strategies and then (2) what type of managers that manage these funds. The strategies that we look at are those that fit into our overall portfolio construction, and as I said we use hedge as a way to manage our overall risk. So for example current market trends, Invesco just came out with a report about how the Repo market, how there’s a lot of stress in that market and there’s a lot of pressure on central banks. Italy just issued bonds in US dollar denominations. So, if you’re in the European market, you would feel a lot of pressure and so what we use for CTAs is that we look at currency that are less.., well by the fact that Italy used bonds in US dollar, signals that the euro is not as healthy. And so now there is more flight to the US dollar, so we would use CTAs to support that. So, if we had currencies in those markets, we would put some pressure on those CTAs to…, or work with CTAs to (lower) our currency risk. Especially since I said we have operating capital, operating companies that have relationships in Europe, so that’s one example. The other is that we are looking at much more flight to quality, and I think a lot of people are, so with hedge, long/short is much more interesting to us because those managers are more nimble in these volatile markets. They allow us to de-risk and deleverage and to get in and out, versus a lot of families just redeem and we don’t believe in that. Once we are with a manager, we are with them for a period of time and we give that. And that may be a little different from other institutions, but as a family, we tend not to rotate our managers out. On that same (note), we take a while to familiarize ourselves with managers when they pitch to us. We take a long time to get to know them, we take a long time to watch them from A to Z. That means from their strategies, from their return, historical, if they are new. We even seed managers if they have a strategy that fits what we are looking at. So we operate more like a fund of funds.
JB: How do you find managers that you are interested in? Do they approach you? Do you use a consultant? How do you sort of qualify who you even become interested in watching for a while?
CS: Well, sourcing managers is something that I don’t manage. I manage the overall portfolio construction and I sit on the overall IC (investment committee). We have a hedge professional that manages that and part of his role is to go and seek managers and we have managed accounts with global funds with global names, but we feel a little at a loss so we’re much more interested in an AUM that’s below $1 billion and often we follow that manager as they grow and they leave that $1 billion-plus fund and build on their existing strategy. We know them (by that point) and we’ve worked with them.
JB: How does your firm feel about some of the newer trends like Artificial Intelligence (AI) or crypto currencies and some of those new arenas that are opening up?
CS: Um, AI is a big broad word. It’s like ‘cyber-security’. Do you invest in cyber-security? Well, everybody is by-default investing in cyber-security, one way or another, whether it’s a new language format or whether it’s in hardware. So to say AI, we look at AI a little differently. We look at whether it supports the application. We do look at funds that are obviously hedge funds that do look at the emerging markets in tech specifically, but for tech, we are so excited about tech that we do direct investments ourselves both in PE (private equity) and VC (venture capital). So less hedge. Hedge US equities are doing very well. We are very bullish on US equities in all asset classes. We do have also a group that looks at mid-market size for direct acquisition in a vertical so trade sales, but that’s a different asset than hedge and for event-driven hedge we are very excited about that. Not just in the US market but also in the emerging markets such as the sub-Saharan African countries. Less so in Southeast Asia. That’s not for everybody, but in our own portfolio construction. We are not as long/short there in event-driven. We are in long/short but…let me clarify…not in event-driven for Southeast Asia but we are very active in event-driven strategies for other markets. As you know, China does not have a long/short hedge fund sector because of regulation.
JB: I didn’t know that. Ok.
CS: Yeah, so the way the regulation works (in China) – it doesn’t have an effective ‘short’ strategy. It’s a long only.
JB: Are there any strategies that are an automatic ‘no’ that you would typically shy away from?
CS: No, not at all. We are both market and sector agnostic when it comes to hedge. It just depends on the duration of our portfolio cycle. Again, it has to be a piece that fits into our overall (portfolio) puzzle and that puzzle constantly gets (re)balanced. When I say constantly, we have a five-year mandate and then an annual mandate. The one-year mandate is very short, so we tend to take a longer vision when we invite new managers into the fold. That goes from FDD (financial due diligence) to LDD (legal due diligence). But most importantly, we usually follow a manager that has left a larger fund and has started to hang their own shingle and that’s exciting to us to give a manager an opportunity.
JB: They usually have a little more capital to start with and some infrastructure under those circumstances (as a spin off manager) so I can see how that would give you more confidence.
CS: Let me go back to AI because that is very exciting and crypto. I think for crypto we are less (excited) just because the regulations are all over the map. So for example, Singapore and Japan recognize cypto as a currency. The US IRS does not. It’s still a commodity so that obviously affects our return by investing in crypto, by holding crypto. So there’s a tax ramification versus it being designated as a currency. And the SEC has considered it a security, but not all cryptos are securities depending on… crypto’s are issued and ICO’s are securities. We’re taking a longer view, especially with quantum computer, so we’re much more interested in machine learning and AI for the broader definition of AI, especially investing in, but this is not necessarily in hedge, but directly companies that look at (computing/programming) language development. For AI, we don’t see one-size-fits-all for language. So there’s ‘R’, there’s Python, which is the leader. There’s over 12…much more than 12 languages already in AI so we see that all of the languages have limitations depending on the applications they are pursuing but we’d like to see AI in portfolio management, in hedge. The use of technology, especially going forward is important to us. So we do look at hedge managers that have invested in tech, whether it’s for research, analysis, or looking at trending of their own portfolio, developing their own…using not necessarily AI to predicate a market signal, but at least using AI to understand there are market signals that they can pull out. So they aren’t wholly dependent on that research but it’s certainly using technology, we think is relevant to our review and how a manager comes to us. That’s an important point.
JB: Right, ok. And it’s still a nascent arena. It seems like there’s not that many AI hedge funds. As far as I know at this point, it’s still a very new space.
CS: Well, I disagree. There’s a lot of funds that use AI and that’s what I meant. They use AI in portfolio optimization, so that is important that they do that. That they leverage tech and external expertise to support their fund, their portfolio construction and constantly look at that. I think that’s relevant to any hedge manager going forward. And if they don’t, well it’s like well you have a tool, why not use it? It’s like why go into combat without a shield when everybody has a shield. So, to us, when a manager doesn’t embrace or know how to use tech in their fund management, in their portfolio, we find that interesting but not in a positive way necessarily for us because we think that there is a lot of value right now in data management and data analytics tools.
JB: So as far as your investment ‘strike zone’ or the criteria that you would require for an investment, would you say that some infrastructure has to be there, some pedigree in terms of coming from, coming out of a spin off to some extent, from a larger, more well known manager. What other criteria are really important to your firm, whether it’s a hedge fund or…I guess I’m speaking in the hedge space for this instance.
CS: Well, unlike some people who just look at sharpe ratios, what we do is we do look at the managers and yes, some pedigree, but we’ve found that (an important fund manager criteria is) people with a passion and especially for a certain strategy and a basis for that. And that they’ve shown, whether it’s in modeling or in regression tests, that we are always interested in new strategies and new views and I think technology has allowed for that because it allows for people to rotate a market or a sector and spin it and see something that others might not see. For us we will, for the managers, of course I said FDD (financial due diligence) and LDD (legal due diligence), those are standard. But we spend time (reviewing a manager before allocating), and that usually is a six-month process. So we can’t just write a check. Especially if we’re going to commit to…and this might be a good time…because our family has to push out a substantial sum of capital per year and hedge is allocated where we have 100 bucks a year to put into hedge and that’s for existing and new managers. And so, for new managers, that’s not quite a lot because that’s per year. So we already have allocation that’s substantially more than that in this asset class. So for new capital…
JB: How much again?
CS: 100 bucks, $100 million
JB: $100 million? I hadn’t heard that reference. Ok.
CS: 1 buck, 2 bucks, yeah so 100 bucks. We have ‘100 bucks’ ($100 million) in new capital, dry powder, new capital, per year for this asset class. And if you add all those years, there is a healthy sum allocated to this asset class.
JB: Yeah, right.
CS: So that’s new capital, per year. And you know how old we are so that is a lot. So that’s why some managers will say, will complain, “that’s ONLY a hundred.” And we say, well for our portfolio, for our asset management, that’s enough per year and so we don’t usually see new managers that expect more from us. We have our own internal mandate on what strategies, again it builds off our overall portfolio construction. So, some years we may be big on CTAs, other years not, so I think for this year we’ve been much more heavily with CTA’s just because of the market and political risks, um and the market. We’re seeing Europe struggling with their central bank, we see interest rates bouncing lower and lower so we think that to leverage our own portfolio, we’ve been a little bit more weighty in the CTA market for ourselves, but that doesn’t mean that’s the right size for other families.
JB: So that ‘100 bucks’ is (allocated) across roughly how many managers per year?
CS: Well, it depends. Some year, it might just go to one (manager) if we like that strategy. We will never give more than $20 (million) to a new manager. We don’t seed. And then that’s quite a healthy (allocation). So some people, some seed are looking for $30 (million). We tend to be a little bit more cautious until we know, even though we may have worked with them, until they get their back office, middle office lined up, until they get the fund administration set up, until they…to us that’s relevant to see how much they invest in that (infrastructure) and how much they value that. To us, that’s meaningful when a manager commits to their own internal infrastructure and their team obviously. So I’m just assuming that the manager qualifies for FDD and LDD, and the manager is somebody we’ve spent time with and know. That’s the capital that we would look at. But somebody walking in off the street, cold leads through LinkedIn or something, we would probably take much more time unless we can validate who they are and who they’ve worked with.
JB: Without naming names, for an emerging manager, tell us about a success story where you were really impressed. LIke for six months under review, month after month, they impressed you. What did they do, aside from performance, that made you feel like they’ve really got their act together.
CS: Well we think that all of our managers that we have right now are quite impressive. We think the world of them.
JB: Emerging managers in particular because it’s a higher bar in terms of pulling off…hitting all the right cylinders I guess all at once since they are usually not as established as some of the more well-known managers. It’s a little harder, so that kind of success story is really interesting when an emerging manager is able to impress an institution.
CS: We’ve been very pleased with getting some emerging managers in African countries off the ground and we’ve been pleased with the community impact that is provided – job training, new jobs, opportunities. It is still a very nascent market, hedge market, because of the regulation, so hedge is essentially long versus long/short. So we’ve been very pleased with how they’ve been able to work with us and how they’ve been able to leverage our ability to provide them with resources from our other managers and also how open they are in terms of the use of not only the tech but the research, and part of our commitment in seeding new managers is really much more…not just ESG (Environmental, Social and Governance investing), but much more of an impact, that they can, that we can build a sector there, that we can assist in building that. And when we have managers that are receptive to that, we’re always excited because we can see they can grow their AUM much faster and much further. So, those managers have always impressed us, when they’re very collaborative. And that’s part of the reason why we do seed and continue to see managers in these markets is that we want to see that sector grow and add financial stability and add financial growth for those countries that a lot of people find outside of their risk profile.
JB: Do you have a little bit more of a bias or favor a little bit more ESG and impact funds in those areas if they can really make a difference, if they’re doing something powerful?
CS: Well, I think ESG is…let me clarify this. I think ESG has been in existence. It’s a buzz word now to be environmentally compliant, social responsibility, corporate governance, those things should be in place already. I think the Europeans have really moved it much further than the Americans. We’ve climbed on it slower. But that’s actually something we have, as American managers, have always been doing anyway. And any fund that hasn’t been compliant is suspect. It’s just a new buzzword, we think. ESG is just part of due diligence and continued compliance, right? You want to be environmentally compliant, you want to be socially responsible, but that’s something that is interesting that those are just compliance for us. That doesn’t mean we focus on funds that are (ESG), that’s their mandate. That (ESG) should just be part of their ongoing practice, their ongoing governance. Impact is very different. You don’t have to be ESG to be impactful, so hypothetically I want to provide education to all children under five and I want these funds to look at anything that has an impact on kids under 5, whether it’s education, health, retail, anything. But they don’t have to be ESG, so that’s kind of a contradiction but that’s really what it means. So we look at impact, but ESG is always part of our overall due diligence and review. But those are subcategories to the overall fund strategy. So the strategy is more relevant to us. What kind of strategy. And as I said, for those markets, event-driven is always very exciting because they know their own markets. I think we are very interested in the energy sector for sub-saharan Africa and looking forward to year 2020 trends, we think that it is a volatile period in our overall market sector but we continue to see energy, new forms of energy, so funds looking at that probably in the long/short category. We look at new food groups. Obviously people are getting so much excitement and buzz over all the Beyond Burgers and Impossible (Foods) and so forth. We are very excited that new food groups not only be healthy but in manufacturing are (also) ESG. And manufacturing is manufacturing the resource. It would be really ironic to go into new food groups and that company is in fact more of a drain and a destruction to our environment.
JB: That makes sense.
CS: So those are things that..it’s exciting if funds, hedges that look at different strategies, but those are much more for our PE and VC space. And we are very active in those sectors. And so energy continues to be something, but as I said, for our overall hedge, how to approach us for capital is really to listen to this segment of your interview, because I laid it out right there. So it’s $100 ‘bucks’ (million) per year, having their ‘i’s’ dotted and ‘t’s’ crossed. I’ll conclude by saying that one strategy may not be exciting in 2019 but may be very exciting in 2020. We really look at the macro economics of our market.
JB: On that note, is there anything you are wary of right now whether it’s in the macro economic and political climate that you’re keeping your eye on globally?
CS: Nothing other than what I had opened up which is I think that the European currencies are euro and I think the crown is at issue. There’s a lot of pressure. I also think that repos have, will be, the repo market is under some duress which leads to to continue to keep an eye out on and there is a continued flight to quality in 2019. In the hedge, and I think there is a role for hedge, a lot of families have left hedge and hedge has gotten a lot of water of taint, if you will.
JS: How come?
CS: Their (hedge fund manager) returns have not really kept up. There are fewer alpha (out) there. There are really much more beta pretending to be alpha. And so for the capital at risk in this when you could actually have a better return in another asset class.
JB: Do you see that affecting fees? You know that sort of mediocrity and performance is forcing hedge..do you feel that should make hedge funds reconsider their typical 2 and 20 fees.
CS: Well, I’m not sure if many funds are getting that 2 and 20 (fee structure). I think that they are getting something. They are certainly and I think that every fund whether its, every fund manager deserves fees commensurate to their performance but to allocate the fee management and their performance is beta gives one…well, you start looking at redemption terms when you go in and then we also look at how the fees are commensurate. And there’s a variety from waterfalls to hurdles to different ways of negotiating those fees depending on the size block you’re investing in. So somebody coming with when 1 buck certainly won’t have this big of a voice as somebody writing a 100 bucks check, right. So we do expect that if we come in at a larger ticket size that we have a little bit better, that we get MFN (most-favored-nation) status. So those are… what I’m saying is not something unusual in the market. What is unusual in the market would be (for managers) to come to us with more interesting…where our investment objectives are aligned and to show us that we are aligned and that they qualify as a manager versus they are living off of fees. And some of the performance we’ve seen with other managers is that they are just living off the fees and their return is beta. And after you look at their Sharpe ratio you know it’s beta. So these things and whether you want to use torino ratio, I mean there’s a whole bunch of tech tools that we use to review a manager’s performance, but we, but again it’s (at) the end of the day it’s getting to the manager and there’s a lot of enthusiasm in providing seed to new managers and to continue to grow, and there’s almost a parental affection when their AUM becomes quite sizeable.
JB: What would be the number one thing you would advise a manager to do before contacting you, before reaching out. And I think you already hinted that your interests should be aligned and so how would they find that essentially?
CS: Well, when I say interests aligned, most LP’s (limited partnerships) and managers should have that in the GP should be aligned. That’s their fiduciary duty. You have young emerging managers, they don’t see that, but the mature managers (do see) that. That’s part of why they are regulated. It’s not them and us, LPs and us, so there has to be that fiduciary obligation. So in terms of alignment, that’s what I mean, in terms of strategies, in terms of strategies, you know we’re open for business so pitch and again, just because there’s rejection one year doesn’t mean that we’re not excited about that next year again it has to fit into our overall portfolio construction.
JB: That makes sense. Lastly, what are you looking forward to next year or as this year comes to a close? And that could be on a personal level or global economic level, anything.
CS: Well, for the global macroeconomic, I hope that things calm down, the trade war is resolved in some capacity. That has a lot of impact on Europe. The US-China trade has indented the European market and we have a lot of assets there. We hope that the Hong Kong-China relationship smooths out. I won’t weigh in on the politics. We’re not a political group, but again, China has over $1.2 to $1.5 trillion dollars of currency in the Hong Kong market. It also serves as the largest debt market for China. China has their largest unicorns listed on the Hong Kong exchange, so Hong Kong is very meaningful to China, and it’s also meaningful for many of us. It is a financial hub and we hope that for 2020 that gets resolved so that it’s in a happy place for all of us.
JB: It’s a really tricky and delicate situation. I can totally appreciate that. I hope so too. But thank you so much Catherine for your insights today. This has been really helpful, and I know that our viewers will find this very valuable and meaningful. So, thank you so much for your input today.
CS: Thank you very much Jennifer for inviting us to speak. I know a lot of people here were excited to be part of your new project. Thank you.